Popular hamburger chain Jack in the Box Inc. (JACK) is on the verge of closing 67 underperforming restaurants under its Qdoba Mexican Grill brand by the end of fiscal 2013 (ending Sept 29, 2013).
The company came to this decision following an extensive operational review and financial analysis of its Qdoba restaurants. The end to negotiations with the leaseholder is also expected to be the reason for this shutdown. All these shuttered restaurants will be treated as discontinued operations.
Currently, there are 647 Qdoba restaurants including 340 company-owned units. Following the closure, the total number of Qdoba restaurants will be reduced by 10%. The restaurateur stated that it expects to incur about $28 million as impairment charges related to the closings and approximately $12 million in lease-related costs during fiscal 2013.
Management believes that since the restaurants were not doing well, closing them would improve the company’s future profit and enhance the cash flow position. Continuous decline in traffic due to macro concerns and resultant conservative spending is the primary reasons behind the sluggish performance.
Jack in the Box’s Qdoba units have been reeling under pressure in various locations. Therefore, this restaurant closures can be seen as a part of the company’s brand revitalization initiative. We believe that it will help the company to reduce its overhead and also allow it to venture into fast-growing markets where traffic is expected to be high.
Jack in the Box is set to open 70-75 new units including 40 company-owned restaurants across North America by the end of fiscal 2013. Moreover, nearly 60-70 Qdoba restaurants are slated to be launched in 2014 in the region.
Jack in the Box carries a Zacks Rank #3 (Hold). Some other restaurateurs worth considering are AFC Enterprises Inc. (AFCE), The Wendy’s Co. (WEN) and CEC Entertainment Inc. (CEC). While CEC Entertainment carries a Zacks Rank #1 (Strong Buy), AFC Enterprises and The Wendy’s carry a Zacks Rank #2 (Buy).
Orange, a subsidiary of France Telecom (FTE) is looking for additional partners to set up its operations in Myanmar. The company is one of the companies bidding for Myanmar's telecom license.
In partnership with Japan’s Marubeni Corporation, Orange submitted its Expression of interest along with other consortiums. The result of the bidding process will be declared on Jun 27, 2013.
The French telecom giant believes that it has a good chance of acquiring the license and wants to tie up with a local Burmese partner. Orange wants to partner either with a non-telecom operator or a small operator, which will possess local knowledge and expertise. Nevertheless, Orange is very clear that it wants to lead the partnership agreement.
Myanmar provides ample opportunity as only 10% of the country’s 64 million population has access to mobile communications. Though wireless service in Myanmar was introduced in 2001, high activation cost has kept mobile phones out of reach for most of the people.
The government of Myanmar wishes to increase the number of telecom carriers from 2 to 4, to enhance the wireless penetration to 80% by 2016.Initially, the government of Myanmar received expressions of interest (EOI) from 91 entities, which then came down to 12 hopeful applicants.
Meanwhile, one of the joint bidders, China Mobile Ltd (CHL) and Vodafone Group (VOD), has opted out of the bidding process for Myanmar’s telecom license. Both the companies cited that the Myanmar telecom license does not meet the strict investment criteria which they follow.
Orange has also declared that on acquiring the telecom license, it will invest around $1 billion over the next 5-7 years to build up a telecom network in Myanmar. However, developing a mobile network in a country with regular power cuts and lack of technical resources could be quite difficult. Thus, we remain skeptical about the success of Orange in Myanmar with such a meagre investment as opposed to other consortiums who have vowed multi-billion dollars in investments.
France Telecom currently carries a Zacks Rank #4 (Sell). Among other stocks, Telus Corp. (TU) carries a Zacks Rank #2 (Buy) and is worth considering.
GlaxoSmithKline (GSK) recently announced that Aspen Global Inc., a subsidiary of Aspen Pharmacare Holdings Limited, has offered to buy Glaxo’s thrombosis brands. Aspen Pharma has also offered to purchase the related manufacturing site in France, Notre-Dame de Bondeville. The financial terms of the deal were not disclosed.
Glaxo’s thrombosis brands include Arixtra and Fraxiparine. In the first quarter of 2013, Arixtra and Fraxiparine generated sales of £49 million (up 2% from the year-ago quarter) and £52 million (down 16% from the year-ago quarter), respectively. The proposed deal does not include right to the drugs in China, India and Pakistan.
Glaxo and Aspen Pharma are no strangers to each other. Glaxo holds approximately 18.6% of Aspen Pharma’s shares (as per Aspen Pharma’s 2012 annual report). Both the companies had entered into a number of deals in the past.
Last year, Glaxo divested the majority of its Classic Brands in Australia and non-core over-the-counter (OTC) brands sold in international markets to Aspen Pharma.
We note that Glaxo’s product portfolio was boosted recently with the approvals of two melanoma drugs, Tafinlar (dabrafenib) and Mekinist (trametinib) and chronic obstructive pulmonary disease drug, Breo Ellipta. Moreover, Glaxo boasts of a robust pipeline. A number of pipeline-related news is expected in the coming quarters. We believe that the pipeline at Glaxo must deliver to combat the generic threat faced by the key drugs of the company.
Glaxo carries a Zacks Rank #3 (Hold). Companies that currently look well-positioned include Biogen Idec (BIIB), Santarus, Inc. (SNTS) and Novo Nordisk (NVO). While Biogen and Santarus are Zacks Rank #1 (Strong Buy) stock, Novo Nordisk is a Zacks Rank #2 (Buy) stock.
On Jun 17, 2013, we reiterated our long-term Neutral recommendation on Invesco Ltd. (IVZ). This is based on its robust first-quarter results and sound capital deployment activity. However, persistently rising expenses, the volatile U.S. dollar and higher level of debt are likely to dent its profitability.
Invesco’s first-quarter earnings outpaced the Zacks Consensus Estimate driven by higher net revenue, partially offset by a rise in operating expenses. Further, increased assets under management (AUM) and a stable balance sheet position were the tailwinds.
Following the first-quarter results, the Zacks Consensus Estimate increased 3.4% to $2.15 per share for 2013 over the last 60 days, with the majority of estimates moving north. Further, for 2014, almost all the estimates moved up, thereby taking the Zacks Consensus Estimate to $2.49 per share, over the same time-frame. With both 2013 and 2014 estimates rising, Invesco currently carries a Zacks Rank #3 (Hold).
Asset inflows at Invesco have witnessed an upward trend over the past several quarters. With stabilizing equity markets, asset inflows are anticipated to contribute significantly to earnings growth.
Moreover, Invesco is an asset for yield-seeking investors. In Apr 2013, the company hiked its quarterly dividend by approximately 30% to 22.5 cents per share. Moreover, the company has an effective share repurchase program in place.
However, higher expenses remain a concern for Invesco. Though the company has adopted a prudent approach to lower its costs and intends to continue with its expense management initiatives, the impact is not expected to be felt in the near term.
Further, high debt level could restrict Invesco from procuring additional finance for working capital, capital expenditures, acquisitions, debt service requirements or other purposes. Additionally, this might put the company in a disadvantageous position if economic conditions deteriorate.
Other Stocks to Consider
Better performing stocks in the same sector that are worth a look include Noah Holdings Limited (NOAH), Virtus Investment Partners, Inc. (VRTS) and GAMCO Investors, Inc. (GBL). All of these carry a Zacks Rank #1 (Strong Buy).
We reaffirm our Neutral recommendation on Robert Half International, Inc. (RHI) and we have faith in the company’s long term fundamental despite sluggish results in the first quarter of 2013.
Why the Reiteration?
Robert Half’s earnings and revenues missed the Zacks Consensus Estimate in the first quarter. Revenues also remained flat year over year due to poor performance of the international segment. We note that Robert Half has significant international presence and more than half of its revenues come from its international operations.
A strong dollar is negatively impacting export sales. In addition, weak staffing demand outside the U.S., especially in Europe, due to an uncertain economic condition resulted in lower revenues in the quarter. On a constant currency basis, revenues increased 4% year over year.
Further, we believe that currency headwinds and a tough job scenario, particularly in Europe, are denting the demand for recruitment services, which keeps us on the sidelines. In addition, cost savings and headcount reduction measures taken by other companies adversely affect placement firms like Robert Half.
However, we prefer to remain Neutral as Robert Half has sound fundamentals. The company has been witnessing strong demand for specialized staffing and consulting services, particularly in the U.S.
Further, the improving global economic condition has heightened the demand for the company's temporary and permanent staffing services and risk consulting and internal audit services. Robert Half’s earnings increased in the first quarter due to the rising demand for skilled professionals in the U.S., particularly in permanent placement, information technology staffing and in Protiviti operations.
Other Stock to Consider
Other stocks that are performing well and are worth considering in the business services sector include Manpower, Inc. (MAN), On Assignment Inc (ASGN) and AMN Healthcare Services (AHS), all with a Zacks Rank #2 (Buy).
Tetra Tech, Inc. (TTEK) recently revised its third quarter 2013 guidance to factor in the impacts of increased restructuring costs from weakness in Eastern Canada and mining. Costs have also increased owing to new findings on certain project claims. During the second quarter earnings call on May 2, 2013, Tetra Tech had mentioned about prevailing weakness in Eastern Canada and mining to adversely impact its business in the upcoming quarters.
Tetra Tech projects these charges to affect the revenue and earnings of all three operating segments. The company now expects revenue for the third quarter (net of subcontractor costs) in the range of $440 million to $490 million. The company expects to incur a loss in the quarter ranging between 30 cents and 50 cents a share, primarily due to the one-time charges that it expects to incur.
Apart from this, the board of directors authorized a $100 million common stock repurchase program.
Third-quarter restructuring costs are now expected to be $50 million, of which $40 million are non-recurring in nature. The increase in restructuring costs is primarily attributable to downsizing of operations as weak economic conditions hamper project demand. Approximately two-thirds of the costs are related to Eastern Canada operations, while about one-third is related to its mining operations. Depending on these expected costs, Tetra Tech will calculate its goodwill impairment charge and will inform investors during the third quarter earnings release.
Tetra Tech’s restructuring initiatives are promising as they are in line with the changes in the market. Right-sizing its operations may help the company to return to its historical profit levels and improve margins.
In addition, Tetra Tech received unfavorable findings primarily associated with claims on four programs during the quarter. Tetra Tech will thus record a charge while continuing with the dispute resolution processes. These claims are related to change orders for certain U.S. federal and state government projects that are facing budget constraints. These charges are expected to total around $45 million.
During the second quarter earnings release, Tetra Tech had lowered its fiscal 2013 earnings per share and revenue guidance. For fiscal 2013, earnings per share are expected to be in the range of $1.60 to $1.75, down from its prior guidance of $1.85 to $1.96. Management also lowered its upper end of revenue guidance and pegged revenue, net of subcontractor cost, in the range of $2.15 billion to $2.25 billion compared with its prior guidance of $2.15 billion to $2.35 billion.
Tetra Tech currently has a Zack Rank #3 (Hold). Some other companies in the industry worth mentioning are CECO Environmental Corp. (CECE), having a Zacks Rank #1 (Strong Buy), and Calgon Carbon Corporation (CCC) and Orion Marine Group Inc. (ORN), each carrying a Zacks Rank #2 (Buy).
NiSource Inc.’s (NI) business division NiSource Midstream Services announced the commencement of service from its Big Pine Gathering facility in support of the long-term gathering agreement with XTO Energy Inc. NiSource Midstream is an affiliate of the company’s Columbia Pipeline Group (CPG).
The entire Big Pine system came online in Apr 2013 providing an outlet for Marcellus shale production in western Pennsylvania. It is a 57-mile, 20-24 inches gathering system situated at the center of the Marcellus formation. The facility spans across the hydrocarbon endowed counties of Alleghany, Butler, Armstrong, Indiana and Westmoreland.
The Big Pine system offers gas gathering and residual gas takeaway services to natural gas operators. It is linked to CPG’s Columbia Gas Transmission, the Texas Eastern Transmission and Dominion Transmission complexes. NiSource’s timely execution of the project will allow the company to meet the needs of the Marcellus producers by delivering natural gas to their chosen markets.
With this midstream initiative, the company hopes to find more investments for further development of the Big Pine system. In fact, NiSource has already found an investor, Penn Energy into the venture and recently inked an individual gathering agreement with Penn.
Of late, the company has increased its focus on the expansion of its various midstream programs. Besides Big Pine NiSource’s other notable project, the Pennant pipeline and processing system is nearing completion and will further boost its transmission capabilities.
Meanwhile, the company is also seeking options to expand its transmission footprint in Northern Indiana. We believe the current shale gas explosion in the U.S. will complement NiSource's varied midstream ventures.
Total natural gas consumption is expected to increase considerably in the future driven majorly by the industrial and power sectors. Industrial sector's gas usage will climb by 14.7% in 2025 from the 2011 level while share of power generation will jump to 27% in 2025 as per the Energy Information Administration. This will certainly bode well with NiSource’s broad future growth objectives.
Based in Merrillville, Ind., NiSource together with its subsidiaries provides natural gas, electricity, and other products and services in Ohio, Pennsylvania, Virginia, Kentucky, Maryland, Indiana, and Massachusetts.
On Jun 18, 2013, the shares of General Dynamics Corporation (GD) climbed to its 52-week high of $79.48. This was primarily driven by the company’s strong booking, operational efficiency and liquidity position.
General Dynamics is flooded with a number of contracts from several government establishments. The comany had a total backlog of $48.5 billion at the end of first-quarter 2013. In the recent past, the company managed to get a few significant contracts. On Jun 4, 2013, the company won a contract, worth $2.8 billion, from the Department of Defense (DoD) and the U.S. Navy to construct four Arleigh Burke-class destroyers.
As of Mar 31, 2013, General Dynamics had a cash balance of $3.74 billion and cash flow from operating activities of $0.5 billion during the first three months of 2013. A strong financial position enables the company to introduce new products, repurchase shares and increase the dividend rate.
General Dynamics has rewarded shareholders by returning a substantial portion of its free cash flow through share repurchases and incremental dividends over the years. During first-quarter 2013, the company repurchased 1 million outstanding shares at an average price of $70 per share. During the quarter, General Dynamics increased its dividend to 56 cents per share. The company’s practice of raising dividend from time to time will benefit the stock as it attracts investor attention.
General Dynamics Canada recently introduced a small and more-capable Airborne Acoustic Processing System, called VENOM. This UYS-505 system leverages commercial-level advances in hardware in order to maximize the detection of submerged threats in deep and coastal waters.
The present valuation also makes General Dynamics attractive. The forward price/earnings (P/E) multiple of 12.2x is lower than the peer group average of 16.1x, reflecting a discount of 24.2%. The price/book (P/B) multiple of 2.4x is also lower than the peer group average of 3.0x. In addition, the company’s operational efficacy is apparent in its Return on Investment (ROI) of 14.2%, which is higher than the peer group average of 13.3%.
General Dynamics currently has a Zacks Rank #3 (Hold). The stocks in the industry that are worth considering include Astronics Corporation (ATRO) and Kratos Defense & Security Solutions, Inc. (KTOS) with a Zacks Rank #1 (Strong Buy), and Curtiss-Wright Corporation (CW) with a Zacks Rank #2 (Buy).
In its weekly release, Houston-based oilfield services company Baker Hughes Inc. (BHI) reported a rise in the U.S. rig count (number of rigs searching for oil and gas in the country). This upside can be attributed to an increase in the tally of oil-directed rigs, partially offset by a lower natural gas rig count.
The Baker Hughes’ data, issued since 1944, acts as an important yardstick for drilling contractors like Transocean Ltd. (RIG), Diamond Offshore Drilling Inc. (DO), Ensco plc (ESV), etc. in gauging the overall business environment of the oil and gas industry.
Analysis of the Data
Weekly Summary: Rigs engaged in exploration and production in the U.S. totaled 1,771 for the week ended Jun 14, 2013. This was up by 6 from the previous week’s rig count and indicates the second increase in 3 weeks.
The current nationwide rig count is more than double the lowest level reached in recent years (876 in the week ended Jun 12, 2009), though it is way below the prior-year level of 1,971. It rose to a 22-year high in 2008, peaking at 2,031 in the weeks ending Aug 29 and Sep 12.
Rigs engaged in land operations ascended by 8 to 1,694, offshore drilling was down by 2 to 54 rigs, while inland waters activity remained steady at 23 units.
Natural Gas Rig Count: The natural gas rig count – which recently slumped to its lowest point since Jun 1995 – decreased for the first time in 5 weeks to 353 (a drop of 1 rig from the previous week). As per the most recent report, the number of gas-directed rigs is down by 56% from its 2012 peak of 811. Moreover, the current natural gas rig count remains 78% below its all-time high of 1,606 reached in late summer 2008. In the year-ago period, there were 562 active natural gas rigs.
Oil Rig Count: The oil rig count – that rocketed to a 25-year high of 1,432 in Aug last year – jumped by 7 to 1,413. The current tally is above the previous year’s rig count of 1,405. It has recovered strongly from a low of 179 in Jun 2009, rising 7.9 times.
Miscellaneous Rig Count: The miscellaneous rig count (primarily drilling for geothermal energy) at 5 remained unchanged from the previous week.
Rig Count by Type: The number of vertical drilling rigs rose by 2 to 441, while the horizontal/directional rig count (encompassing new drilling technology that has the ability to drill and extract gas from dense rock formations, also known as shale formations) was up by 4 to 1,330. In particular, horizontal rig units – that reached an all-time high of 1,193 in May 2012 – fell by 2 from the last week’s level to 1,086.
Zacks Rank: As of now, Transocean, Diamond Offshore and Ensco are all Zacks Rank #3 (Hold) stocks, implying that these are expected to perform in line with the broader U.S. equity market over the next one to three months.
Raytheon Company (RTN) received a $115.9 million contract extension from the U.S. Army Aviation and Missile Command for the delivery of engineering support services to the Patriot Air and Missile Defense System. The original contract was awarded in the first quarter of 2013.
Patriot missile upgrades will be carried out by Raytheon at the Integrated Air Defense Center in Andover, Mass.; IDS Headquarters in Tewksbury, Mass.; the Warfighter Protection Center in Huntsville, Ala.; and the Mission Capability Verification Center in White Sands, N.M.
Under the contract, Raytheon will continue to offer improved capability support which includes system analysis, software advancement, testing and logistics support and other country-specific system needs. Raytheon intends to upgrade the Patriot Missiles to better equip the U.S. Army and Foreign Military Sales customers to meet evolving threats.
Raytheon is a key contractor of the Patriot missiles both in the U.S. and internationally and is the system integrator for Patriot Advanced Capability-3 missiles. The patriot missiles have revolutionized defense systems all over the world with North American Treaty Organization and 12 Patriot partners currently relying on the Patriot system for protection against outside forces. However, the number might rise as negotiations with Kuwait for the Patriot system are nearing completion.
The Post Deployment Build-7 is the latest software addition to the Patriot Missile and Defense systems. This will provide cutting edge capabilities to soldiers by leveraging the Patriot Configuration-3 hardware modernization in the radar and battle management command, control, communication, computers, and intelligence areas.
Recently, the company was able to secure sizeable contracts from the Department of Defense of which the biggest was valued at $534.8 million for the production of Advanced Medium-Range Air-to-Air Missiles for the U.S. Air Force and the militaries of Oman and Saudi Arabia.
The series of contracts will certainly prove beneficial for Raytheon and will enable the company to maintain a stable earnings stream amidst the current budget sequestration in the U.S. At present, Raytheon retains a Zacks Rank #2 (Buy).